Q 1: Why Indian market focus for listed equity investments?
A: India is a high-growth market that accounts for 2.5% of world GDP, and a substantial portion of the population is rapidly joining the middle class through employment in a wide range of industries. Furthermore, with 3 out of 29 states having population over 100 million people the Indian investment opportunity set should not be constrained by an overly simplistic view of India just being the "I" in "BRIC". We don't rely on this obvious long-term 'macro' story but work diligently to capitalize on businesses which have a strong sustainable position in their competitive universe, are run by capable/ethical management teams with a long-term focus, and are often selling at valuations that allow ample buffer for temporary shortcomings in execution and/or negative macro/industry-specific surprises. The Indian equity market is valued at $2.5 trillion USD and there is a strong market microstructure that supports investor engagement (low concentration, good liquidity, strong corporate governance, and steady foreign investment). Please see pages 3-5 of the Fund presentation.
Q 2: What is the outlook for investments in India?
A: Current economic outlook is strong due to a variety of reasons. Firstly, the political situation in India is continuing its evolution (from a push driven socialist model with all its inextricably linked leakages to a pull driven outcome-based system with technology enabling formalization), with a single party (Narendra Modi's BJP) most likely continuing to push and further reform the economic structure. Secondly, cyclical factors are improving on account of several drivers – capacity utilizations are improving, currency appears to be on a solid footing, partly due to the deft leadership by Reserve Bank of India (RBI), and partly on account of the sharp fall in commodity prices globally (material costs make nearly a fourth of benchmark constituent revenues, excluding financials), and rate cycle has decidedly peaked. Thus, in a global economic landscape of low stable growth, India stands strong due to a confluence of structural and cyclical changes that will play out over the next several years and further improve earnings growth for our well-placed businesses.
Q 3: Who is the Investment Manager of the Fund?
A : Metis Capital Management (MCM) is the Investment Manager of Metis Opportunity Fund.
Q 4: Why Metis India Opportunity Fund (MIOF)?
A: We have delivered not only best in class absolute returns, but have done so across market cycles and with very strong risk-adjusted attributes. MOF's strong track record in India is a result of our background (which includes "Western" education/ethical framework), ability to stay disciplined across market environments, and our on-the-ground appreciation of the market. We started our track record in India in April 2011, near the height of previous market cycle, and have been able to significantly outperform even prior to the large C2014 rally in Indian equities. We focus on capital preservation first before we get interested in the upside. For example, in C2011, Metis Opportunity strategy (INR) was down -9% vs. -21% for the S&P BSE 500 (INR). Thus, our upside/downside capture and Calmar ratio are consistently favorable since inception.
Q 5: What is MCM’s experience in Indian and how will it uniquely benefit investors?
A:The two co-founders/portfolio managers started their Indian strategies in April 2011 after months of preparation/partnership discussions. After few years of meaningful outperformance over diversified equity benchmarks and our peers, we started working on an offshore India focused strategy in mid-2013. We received an early investment commitment from an established Dubai based family office in August 2013 and started work on the setup. In early March 2014, we received the committed funds and launched Metis India Opportunity Fund ("MIOF"). MIOF is a simple 50/50 blend of the two India-dedicated domestic strategies that the co-founders have been managing since April 2011. In INR terms (since inception to December 2018) we are up 188% vs. 115% for the S&P BSE 500 TR. In USD, we are up 85% vs. 55% for the S&P BSE 500 (USD TR). Annualized USD return of 8% vs. 6% for benchmark.
Q 6: How is MCM's strategy distinguished from the other hedge funds investing in Indian market?
A: We attribute our performance to a combination of People, Process, and Partners (internal and external) that we have developed over the years. Ours is a team with global bottom-up value investing experience across industries and market capitalizations. Not only do we routinely engage in deep-dive company specific work, we are uniquely positioned to appreciate tertiary effects on local equities (for example, G7 economic movements), which we believe is a critical attribute when investing within markets with inefficient price discovery mechanisms. Our work on India suggests that the market is replete with inadequate price discovery mechanisms, significant distraction within business models (non-core ownerships), misinformed/unsophisticated understanding of fundamentals beyond the common "macro story", limited transparency in so far as transactions are concerned, sub-standard disclosure requirements, and low equity floats - all factors which lead to inefficient capital allocation. While most Indian investors under-appreciate the associated risks, many sophisticated overseas investors fail to realize the opportunities that such market inefficiencies provide, particularly during periods of panic. Our disciplined and rigorous investment philosophy and process forces us to constantly protect our downside while capitalizing on mispriced risk.
Q 7: Please describe MCM's local presence in India?
A:Being an offshore registered fund, we conduct research operations in India ourselves or via local partners. Both co-managers have a local advisory office and in conjunction individual offices in India. Thus, we have our eyes and ears firmly on the ground, which allows us to understand and capitalize on the unique quirks and opportunities of the market.
Q 8: What is the investment focus of Metis India Opportunity Fund (MIOF)?
A:Since MCM Is a bottom-up investment firm, we are market sector and market-cap agnostic. However, we do limit that no one industry makes up more than 30% of the book. Please contact manager for further details.
Q 9: Please explain MCM's track record in Indian market, giving details of specific investments.
A: Audited and GIPS compliant track record of strategy is available since April 2011. The fund has routinely owned 15-25 positions over this period and currently holds position in 20 businesses. Please peruse the quarterly newsletters on the website (www.metisopportunity.com) and contact managers for specific details on individual investments. In USD terms (since April 2011 track record inception), the fund is up +85% (till December 2018) vs. 55% for the S&P BSE 500 TR (annualized return of 8% vs. 6%).
Q 10: What is the investment philosophy of MIOF?
A: Our work across cycles confirms that Indian equities are efficient over most 3+ year rolling periods. However, it is a challenge to find investment ideas that have fundamental factors that have not already been discounted by the market participants to varying extents. However, markets, as in any human endeavor, can make mistakes in the short-run and can be prone to certain biases (swing between optimism and pessimism, over-reliance on macro factors, etc). Our goal will always remain to keep our focus on long-term outperformance while ensuring that short-term factors are properly acknowledged and mitigated against.
Q 11: What is the investment strategy of MIOF?
A: We are constantly seeking to build/rebuild a portfolio of well-diversified, yet fairly concentrated (20-35 positions) book. In both our internal strategies, we do rigorous fundamental bottom-up due diligence with a focus on identifying the unobvious (clearly quantifiable catalysts and unobvious negatives), and on company management/corporate governance. Given the lags and gaps in information dissemination, we have created a forensic framework that allows us to not only steer clear of lemons but also allows us much needed insight into intrinsic valuations. We attempt to triangulate intrinsic value using absolute and relative valuation models in order to give us a high level of conviction and ample margin of safety. Thus, we typically steer clear of street "darlings" unless there is clear fundamental conviction.
Q 12: Detail the Fund's investment process.
A: We don't constrain our investable universe by looking at simple metrics such as earning yields or inter-industry value dislocations (P/CF, P/B, etc). Each investment is diligently researched and we seek free optionality in each asset. The only word we may ever use in conjunction with "momentum" is in relation to a company's earnings. We pay no heed to momentum in prices, preferring to drill down on assets where market price doesn't appropriately value an underlying business. Our process thrives on discipline and is well positioned to look for and own solid businesses at attractive valuations with investor friendly management at the helm. While ideas can germinate from either top-down thematic thoughts or specific financials, they are run through a screen that checks for accounting clarity, consistency, and organic growth. If the idea clears the screen, we model the business out, do further forensic checks in order to flag governance or accounting issues, and begin the process of identifying the unobvious drivers. Furthermore, the 2 co-managers play devil's advocate and try to" kill" each other's best ideas due to reasons such as valuation, management integrity/ability, strategic advantage not durable enough, lack of accounting clarity, and/or lack of identifiable catalyst.
Q 13: What has been the average turnover of the strategy since inception?
A: The average turnover (defined as lesser of total sales or purchases (ex cash) / average monthly assets over the year) has averaged 8.7% in the past 3 calendar years to 2018.
Q 14: What is your investment policy in regard to SMEs?
A: While we are capitalization agnostic, a vast majority of our historical exposure has been within India's small and mid-cap universe. Within a country where large-cap benchmark constituents are the most covered benchmark constituents in the world, several quality small and mid-cap businesses go either uncovered or are sparsely covered. It has therefore been easier for us to identify solid stories at attractive valuations within this space. While this space is broadly viewed by investors as "risky", our performance shows that it's possible to generate extremely solid risk-adjusted returns through a thorough bottom-up approach.
Q 15: What is your view on hedging INR exposure?
A: Since our capital was all onshore earlier, we didn't take a view on INR while managing our onshore strategies. With the launch of our offshore fund, we now manage our FX risks through operational exposure and hedging. While operational exposures are managed through creating a diversified book of businesses with differential FX exposures, we have the flexibility to also hedge INR/USD. However, given RBI's import cover, vastly improved CAD, and institutional portfolio mix (90%+ of India's institutional portfolio capital stock is in equity, which responds better to easing) we are currently comfortable with assuming the INR depreciation risk.
Q 16: What is the Fund's cash management policy?
A: Cash is a function of our ability to find enough diversified names that meet our rigorous tests of safety and growth. We invest the cash in highly liquid, safe, and competitive liquid funds. Also, we view frequent panics within emerging markets as ideal opportunities to deploy cash within quality assets. To that extent, our ideal cash position is between 10-20%.
Q 17: What is the legal structure/domicile of the Fund?
A: MCM is an open-ended limited liability company domiciled in Republic of Mauritius.
Q 19: What is the accounting standard for the Fund?
A: Fee equalization via issuance of different series of shares every time shareholders subscribe.
Q 20: Is there a lock-up period for the Fund?
A: For Class A, during the first year of subscription, redemptions can be made by paying the full pro-rated annual management fee agreed with that particular redeeming Shareholder. Post first year of investment, there is no "soft or hard" restriction. Please contact manager or representative for Class B/Class C lock-up details.
Q 21: What are the minimum investment amounts?
A: Per FSC (Financial Services Commission in Mauritius), the initial minimum investment by a shareholder is $100,000 USD and incremental investment minimum is $50,000 USD.
Q 22: What is the intended investor base for this Fund?
A: Professional investors, qualified high net worth individuals, family offices, and institutional investors. Ideal investor would have a minimum holding period of 3 years.
Q 23: What is the target return of the Fund?
A: The target relative return for the Fund is to outperform relevant benchmarks by over 500 bps (annualized) over a meaningful time frame (3+years).
Q 24: Is the Fund permitted to borrow?
A: Fund is permitted to, but is not leveraged and has no plans to leverage.
Q 25: Please describe the fee structure for the Fund.
A: Tiered management fee structure (Class A): ≤ USD $1 million: 1.50% > USD $1 million to USD $5 million: 1.25% ≥ USD $5 million: 1.0% Incentive fee: 15% of the yearly excess return above the hurdle rate (Class A). Hurdle rate is 8%. Please contact manager or representative for Class B/Class C fee details.
Q 26: Please give detail as to the Fund's risk mitigation procedures?
A: We define risk based on probability of permanent loss of capital and also of not earning adequate (relative to other alternative liquid investments) risk-adjusted return for a significant amount of time. Nonetheless, our historical volatility has trailed all benchmarks and Eurekahedge India index. The Portfolio Managers utilize internal risk models, exposure and portfolio characteristics analyses to identify and mitigate overall risk. Typically, high conviction long positions represent 7% to 12% of the Fund and no position is to exceed 15% (at end of any business day – reduced exposure by next business day at the latest). We also try and get geographical diversification (when feasible and prudent) in respect to earnings/cash flows of the underlying holdings.
Q 27: Please list your service providers?
A: Our service providers are as follows:
(i) Custodian/Broker - Kotak Mahindra (Intl.) Ltd.
(ii) Legal Advisor - Bedell Cristin (Mauritius)
(iii) Administrator – Apex Fund Services (Mauritius)
(iv) Auditor/Tax Provider - Grant Thornton/NJC Associates